THE NATION

IRS Plans Intensive Auditing

Taxes: Compliance program will examine 49,000 taxpayers to ferret out cheating.

The Internal Revenue Service, worried that tax cheating is on the rise, wants to bring back a version of the "super audits" that were so dreaded and controversial that they were all but eliminated by the agency.

The IRS said Wednesday that it plans to audit 49,000 taxpayers selected at random under its revamped taxpayer compliance program--dubbed the National Research Program--beginning this fall.

However, the agency said the program will not be as wide-ranging as its proposed 1995 plan to subject 153,000 Americans to detailed, line-by-line audits.

Only 2,000 taxpayers will be targeted for line-by-line audits, the IRS said. About 47,000 returns examined under the proposed project will be checked by a combination of computerized data matching, taxpayer correspondence and more directed audits that focus on only a few select issues, the IRS said.

"The process is substantially less intrusive on taxpayers, but it will help us catch tax cheating and improve tax administration," said IRS Commissioner Charles Rossotti. "We have found new ways to use existing information to measure tax compliance."

IRS critics were quick to denounce the new audit program.

"I think this is insidious," said Robert Schriebman, a tax attorney in Rolling Hills Estates who was a key witness in the IRS oversight hearings in the mid-1990s.

"It is very frightening. It's not the 2,000 potential audits. It's 'Where does it stop?' People might think, 'There are millions of tax returns, who cares about 2,000?' But what is it going to be next year?"

Treasury Secretary Paul H. O'Neill said detailed tax exams are necessary to ferret out tax cheating. The old super audit program, known as the Taxpayer Compliance Measurement Program, was widely feared by taxpayers. But those audits resulted in a wealth of data that helped the IRS pinpoint where audits were needed.

For example, the old compliance audit program revealed that taxpayers were frequently claiming tax deductions for nonexistent dependents. The IRS subsequently decided in the late 1980s to ask taxpayers to include a Social Security number for each child claimed as a dependent. The next year, the number of dependents claimed dropped by 7 million.

The last taxpayer compliance audits were conducted in 1988 and the data used to target tax returns for "routine" audits are hopelessly out of date, government officials said. As a result, the IRS is increasingly auditing taxpayers who have done nothing wrong.

"The IRS is simply auditing too many of the law-abiders and not enough of the people who avoid paying taxes because [the agency] lacks the basic information to make informed audit decisions," O'Neill said in a prepared statement. "That only hurts the honest taxpayers and helps the cheats, and that's backward."

The IRS estimates that the new compliance audit program will eliminate about 15,000 so-called no change audits annually. Those are cases in which the IRS audits returns only to find that the taxpayer meticulously obeyed the law.

Officials also hope the program will slow the growth of tax cheating. The IRS estimates that the tax gap--which includes the amount owed by non-filers and those who under-report income--soared to $278 billion in 1998. A 0.1% improvement in compliance would generate $1 billion in tax revenue, the agency said.

The IRS is seeking input on the new compliance program from Congress and tax preparer groups, IRS spokesman Terry Lemons said. If the response is favorable, the program could launch in October.

The IRS brewed up a storm of controversy on Capitol Hill in the mid-1990s when it last tried to launch a round of intensive compliance audits. Congressional leaders compared the program with the Inquisition and the IRS later dropped the idea, citing budget cutbacks.

Iowa Sen. Charles Grassley, the top Republican on the Senate Finance Committee and former member of a commission that restructured the IRS in 1998, said Wednesday that the agency needs to be mindful of taxpayer rights.

"I'll monitor the IRS' implementation of this program closely to ensure that the agency strikes the proper balance between taxpayers' rights and its informational needs," the senator told Bloomberg News.

Under the new compliance proposal, 8,000 returns would be checked solely through computerized matching programs, requiring no contact with the taxpayer. An additional 9,000 would involve the exchange of correspondence between the IRS and the taxpayer, the agency said. About 30,000 would involve sit-down meetings with auditors, but would not feature line-by-line scrutiny or require voluminous documentation.

Only 2,000 of the compliance audits would be so-called calibration audits requiring the selected taxpayers to document each line of each return, the agency said. Even in those cases, the agency plans to require less documentation, Lemons said.